Economists: Trump’s trade and tariff plan the only way to save US manufacturing

Economists: Trump’s trade and tariff plan the only way to save US manufacturing

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This post was written by Ann Spangly

Free trade, fair trade, or protective tariffs? Free traders insist that their policy of no tariff’s allows for a great economic benefit, but when one looks closer at the data, Tariffs may be the best way to save American jobs.

A sizable number of Americans still see free trade as a good thing for the country, but they’re evenly divided over whether it’s a job killer or a job creator. That helps explain why most favor protective tariffs on countries that pay their workers less than we do.

Larry Kudlow:

Economist, radio host, and CNBC senior contributor Larry Kudlow appeared onBreitbart News Daily Friday morning to discuss economic issues in the presidential race, including his support for Donald Trump’s economic platform, with some disagreement about the best way to handle unfair Chinese trade practices.

“Well, I may be part of that fetish,” Kudlow said with a chuckle. “Free-market capitalism is the best path to prosperity.”

Kudlow said he found Trump’s platform very agreeable to free-market growth: “He has a very good corporate tax-cut plan, across the board, for large companies and small companies. He’s got a 15 percent rate — we’re about 35 to 40 percent now.”

“So let’s say that became law,” Kudlow continued. “You’d see a movement, atremendousmovement, of capital and labor back to the United States, that’s in China and overseas, because we’d have a more hospitable business tax environment. You include immediate deductions for new business investment, and you include repatriation, which is all in Trump’s plan, and you’ve got yourself a powerful incentive to move back to the USA.”

Kudlow thought such “incentive economics” were better tools than the tariffs Trump has proposed for punishing businesses that move overseas, preferring carrots to sticks. However, he agreed that stern measures were needed to deal with China, which Bannon described as a “mercantilist society” — the government actively harming foreign competition to give native industries an edge.

Kudlow described China as “our enemy, not our friend,” citing their aggression in the South China Sea, and their willingness to stand behind “some of the worst terrorist dictatorships in the world,” including Iran. He stressed the importance of responding to China’s “counterfeiting of goods, stealing of our intellectual property rights, and cyber-hacking our systems here, both government and industry.”

Having said that, Kudlow added he was “not a guy who likes tariffs,” which he described as taxes that would “hurt the American consumer.” He preferred using international bodies such as the World Trade Organization to deal with unfair practices by China and others… provided America fields a president who can negotiate tough trade agreements and not “give up all the time, which unfortunately has been the case.”

He returned to his theme of incentive economics as the best way to restore American manufacturing and reverse capital flight.

“If you lower marginal tax rates on business, both large and small… if you roll back regulations, for example, let’s go to right-to-work laws, which would make us much more hospitable to investment… those are the things that would help America, and that’s what we should focus on,” he advised.

People-Centered Development ForumMost public discussions of free trade treat “protectionism” as a dirty word. The recent debates on the North American Free Trade Agreement (NAFTA) and current debates on the General Agreement on Tariffs and Trade (GATT) are a case in point. Protectionism to economists usually means protecting an inefficient, lazy and often monopolistic national industry against really efficient foreign competition to the detriment of consumers. This kind of protectionism is economically inefficient and should be resisted.

This does not mean, however, that protectionism is always bad. To the contrary, there are important instances in which protectionism is an essential precondition even to economic efficiency. The most fundamental rule of economic efficiency in a market economy is that the full costs of producing a product must be included in its price. There must be no subsidies.

When the environmental costs of producing a product are passed on to the larger society, this constitutes a form of subsidy by the society to the producer. When a country requires that environmental costs be internalized in prices, this is a step toward greater economic efficiency. However, when a country with policies that support this form of economic discipline engages in free trade with one that does not, the tendency will be for more and more production to shift to the latter. This reduces economic efficiency and should be resisted as vigorously as the protection of inefficient national monopolies.

Free trade also has enormous consequences for the standards a society choses for itself that must be treated separately from questions of pure economic efficiency. Standards regarding the distribution of income exemplify the issue. Whether intended or not, free trade between the countries of North American under NAFTA represents an active commitment to a low wage policy. While NAFTA was often presented as a generous act by Canada and the United States to share their great wealth with Mexico, proponents made little mention of who was to do the sharing. In fact, it is the laboring class, which in the United States has already suffered a seventeen percent decline in real wages since 1973. Lower wages mean that returns to those who own capital in all three countries will go up. In reality the workers in the United States and Canada will not be sharing their declining wages with underpaid Mexican workers so much as with the owners of capital.

We have come to speak of global competition as a major value. Are we competing for a good standard of living for most of our people? Eighty percent of the U.S. labor force is classed as non-supervisory employees. What is the value of competing to lower the incomes of eighty percent of U.S. working people? We could do many unwise things to make ourselves more internationally competitive, such as moving back to child labor. That doesn’t mean we should. There are two ways to make products cheaper for the consumer. One is to increase efficiency. Everyone favors that. The other is to reduce environmental and employment standards. Reducing the wages paid for a given amount of productive work represents a lowering of standards, not an increase in efficency.

Free trade encourages a standards lowering competition as much as it motivates increases in real efficiency. It is important to distinguish between the two. There are real gains from trade, but there are also benefits in maintaining a degree of local self-sufficiency which is very different from autarky. Let me close with a quote from John Maynard Keynes, who in 1933 wrote an overlooked essay on national self-sufficiency. I’ve heard this referred to as the aberration of a great mind. But I think it was the clear thinking of a great mind. He said the following: “I sympathize therefore, with those who would minimize, rather than with those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel, these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible. And above all, let finance be primarily national.”

About the Author:Herman E. Daly is senior economist at the Environment Department of the World Bank and co-founder and associate editor of the journal Ecological Economics. The views expressed here are his own and should not be attributed to the World Bank. This column was prepared and distributed by the People-Centered Development Forum based on his presentation to a conference sponsored by the Institute for Policy Studies in Washington, D.C.

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